Yahoo CEO set to refresh turnaround plan

DouglasMacMillan

Yahoo Inc. chief Marissa Mayer will seek to fend off a challenge from activist investor Starboard Value LP this week by detailing her plan for turning around the struggling Internet business.

When the company shares its third-quarter results on Tuesday, Ms. Mayer is expected to outline cost-cutting efforts and give new details about how the company is evaluating possible acquisitions, said a person who was briefed on the plan.

Yahoo is considering acquiring one or more large technology startups with some of the $5.8 billion it made from the initial public offering of Alibaba Group Holding Ltd., according to people who have discussed possible deals with Yahoo representatives.

A large acquisition could help Ms. Mayer generate significant new streams of revenue at Yahoo, where sales have declined in four out of the past five quarters.

For the quarter ended Sept. 30, analysts expect the company to report revenue, excluding commissions paid to partners, of $1.05 billion, a 2.8% decline from the same period a year earlier.

Acquiring a rising competitor in the world of content or advertising technology could also bolster the chief executive's pitch to marketers, which provide the bulk of Yahoo's revenue but which have in recent years moved more of their budgets to Google Inc. and Facebook Inc.

It is unclear whether Ms. Mayer's new plan will appease shareholders, who are growing impatient with the CEO's lack of progress in her more than two years at the company, said RBC Capital Markets analyst Mark Mahaney. After Alibaba's IPO, investors who owned Yahoo stock as a proxy for the rapidly growing Chinese e-commerce company are more closely scrutinizing the value of Yahoo's core business, he said.

"People are going to now say, 'I had a very good reason to own your stock in the past,' " Mr. Mahaney said. "Now it becomes more of a show-me story. 'Now I can buy Alibaba. Now I need a reason to own Yahoo.' "

Investors currently value Yahoo at roughly $38 billion based on the company's Friday closing share price of $38.45, which is down about 10% since an eight-year high of $42.88 on Sept. 12, a week before Alibaba's IPO. Backing out Yahoo's net cash and remaining stakes in Alibaba and Yahoo Japan and assuming it will have to pay taxes when it sells those assets, Yahoo's core business could be valued at about $4.4 billion.

The pressure on Ms. Mayer intensified last month, when activist investor Starboard revealed it had taken a stake in Yahoo and sent a letter to the CEO. In it, Starboard pushed the company to reduce costs, explore a combination with AOL Inc. and consider splitting its core business from the Asian assets.

The investor also called for Yahoo to halt its acquisition strategy, which it said has cost the company $1.3 billion and "clearly not delivered value to shareholders." Besides blogging platform Tumblr, for which Yahoo paid $1.1 billion in early 2013, Ms. Mayer has bought more than three dozen small startups. Starboard contended that these startups are losing Yahoo "a considerable amount of money" and "have failed to deliver material revenue growth."

The two sides plan to meet for the first time later this month, according to people familiar with the matter. Yahoo's deadline for proxy proposals--the investor's most likely avenue for putting its proposals to a shareholder vote--are in early January 2015.

On Tuesday, Ms. Mayer is expected to defend her acquisitions as a vehicle for adding engineers with expertise in mobile apps and other emerging areas, according to the person briefed on the plan. The company expects to do fewer of these small deals going forward, as Yahoo focuses on building products rather than adding talent, the person said.

That shift in strategy would echo the private talks representatives of Yahoo have held with venture capitalists in recent weeks, as the company reached out to assess possible larger deals, people familiar with those conversations said. Jacqueline Reses, the company's top deal maker, had become better known in this community for doing "acqui-hires," or smaller deals for talent.

Ms. Reses ruled out an acquisition of AOL in comments she made at a technology conference in July. Starboard said in its letter last month that a merger of the two Internet pioneers would save Yahoo as much as $1 billion and make it more competitive.

Yahoo has said it would return at least half the Alibaba IPO proceeds, or about $2.9 billion, to shareholders through a buyback or dividend. The company has said it plans to update shareholders on how it will distribute that cash when it releases its third-quarter results. Along with $1.55 billion in net cash, Yahoo would have more than $4.4 billion to spend on acquisitions. It is unclear which companies Yahoo has considered acquiring.

While finance chief Ken Goldman has said he is researching ways to avoid paying taxes on the remaining Asian assets, Yahoo is still restricted from discussing its plans around taxes by the terms of its agreement with Alibaba.

Ms. Mayer is also likely to explain her recent decisions to lay off nearly 500 employees in India and Jordan as part of a broader effort to cut costs, the person familiar with Yahoo's plans said. Yahoo is "streamlining" its operations in foreign offices, which might involve a combination of closing offices, cutting jobs and moving workers to its Sunnyvale, Calif., headquarters, the person said.

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